Psychological Contracts

Psychological Contracts

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You need to write an essay related to the development of an employee’s psychological contract. This essay is designed to widen your knowledge of this particular facet of the employer-employee relationship. Hence, you are required to widely research the concept of psychological contracts and write an essay that discusses the construct. Details of what is required within this assignment will be discussed in class.

A psychological contract expresses the combination of beliefs and mutual understandings shared by an individual and an employer with regard to the expectations of one another in the workplace. It can be described as the set of reciprocal but not necessarily articulated expectations that exist between individual employees and their employers (Maunder, 1998). Although it is possible to examine a psychological contract in a “snapshot” in time, it is important to understand that is “organic” i.e. developmental and “living”. A snapshot taken in the first months of an employment relationship will be very different from one taken in the same relationship several years later. As defined by Schein:

‘The notion of a psychological contract implies that there is an unwritten set of expectations operating at all times between every member of an organization and the various managers and others in that organization.’ (Schein, 1965, p156)

This statement has been further modified by Rousseau and Wade-Benzoni who stated that:

‘Psychological contracts refer to beliefs that individuals hold regarding promises made or implied, accepted and relied upon between themselves and another. Because psychological contracts represent how people interpret promises and commitments, both parties in the same employment relationship (employer and employee) can have different views regarding specific terms’ (Rousseau, Wade-Benzoni, p467)

Psychological contracts differ from conventional employment contracts in that they may contain thousands of items; both parties may have different expectations, since some matters may have been explicitly discussed and others only inferred; and they change as the individual's and the organization's expectations change. As Spindler comments:

‘Every day we create relationships by means other than formal contracts... As individuals form relationships they necessarily bring their accumulated experiences and developed personalities with them. In ways unknown to them, what they expect from the relationship reflects the sum total of their conscious and unconscious learning to date.’ (Spindler, 1994, p328)

The creation of a strong working psychological contract is dependant on the commitment and effectiveness of the employee within in the organisation. The extent to which their own expectations of what the organization will provide for them and what they owe the organisation in return must match the organisation’s expectations of what it will give and get in return (Schein, 1965).

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For an effective psychological contract to be developed, the expectations of both the employee and employer need to be expressed clearly and mutually understood. The development of a psychological contract for the employee may include understandings about the nature of what is actually to be exchanged (assuming there is some agreement; money in exchange for time at work), social need satisfaction and security in exchange for hard work and loyalty, opportunities for self-actualization and challenging work in exchange for high productivity, high-quality work, and creative effort in the service of organizational goals, or various combinations of these and other things (Guest, Conway, Briner, Dickman, 1996). Employers may expect employees to do their best on behalf of the organisation – ‘to put themselves out for the company’ – to be fully committed to its values, to be compliant and loyal, and to enhance the image of the organisation with its customers and suppliers (Stroh, 2002). It is not uncommon that the terms of a psychological contract can be misunderstood by the two parties. Thus it is crucial to highlight any areas of weakness or uncertainty before committing to the psychological contract, as no one is legally bound to the agreement or terms.

Employee/ employer expectations in the development of the psychological contract can take the form of unarticulated assumptions. ‘A balanced relationship between the employee and the organisation is essential for the development of a continuing, stable psychological contract. However, the violation of the psychological contract can signal to the participants that the parties no longer share a common set of values or goals (Sims, 1965). Disappointments on the part of management as well as employees may therefore be inevitable. These disappointments can, however, be alleviated in the development and continuation of the psychological contract if managements appreciate that one of their key roles is to manage expectations, which means clarifying what they believe employees should achieve, the competencies they should possess and the values they should uphold. And this is a matter not just of articulating and stipulating these requirements but of discussing and agreeing them with individuals and teams (Sims, 1965).

The aspects of the employment relationship covered by the psychological contract will include, from the employee’s point of view:
• how they are treated in terms of fairness, equity and consistency;
• security of employment;
• scope to demonstrate competence;
• career expectations and the opportunity to develop skills;
• involvement and influence;
• trust in the management of the organization to keep their promises;
• safe working environment (Guest, Conway, 2005) .

From the employer’s point of view, the psychological contract covers such aspects of the employment relationship as:
• competence;
• effort;
• compliance;
• commitment;
• loyalty (Guest, Conway, 2005).

Content Consequences
Organisational culture

HRM Policy & Practice




→ Fairness


The Delivery of the Deal

→ Organisational leadership

Organisational Commitment


Satisfaction & Well-being

A model of the psychological contract (Guest, Conway, Briner, Dickman, 1996).

Psychological contracts are not developed by means of a single transaction. There are many contract makers who exert influence over the whole duration of an employee’s involvement with an organisation.

The formation of a psychological contract may provide some indication of the answers to the two fundamental employment relationship questions that individuals pose: ‘What can I reasonably expect from the organisation?’ and ‘What should I reasonably be expected to contribute in return?’ In answering these questions, it is a common misconception that both parties uphold their terms of agreement when committing to a psychological contract (Armstrong, 2006).

The problem with psychological contracts is that employees are often unclear about what they want from the organisation or what they can contribute to it. Some employees are equally unclear about what they expect from their employees. Because of these factors, and because a psychological contract is essentially implicit, it is likely to develop in an unplanned way with unforeseen consequences (Guzzo, Noonan, 1994). Anything that management does or is perceived as doing that affects the interests of employees will modify the psychological contract. Similarly the actual or perceived behaviour of employees, individually or collectively, will affect an employer’s concept of the contract. The individual and organisational consequences of violations of the psychological contract are clear examples of why psychological contracts are necessary for there to be continuing, harmonious relationships between employees and organisations. Because psychological contracts are entered into as individuals join the organisation, whether the individuals' expectations about the contract are met is crucial to their ongoing relationship (Guzzo, Noonan, 1994).

As Guest et al pointed out: ‘A positive psychological contract is worth taking seriously because it is strongly linked to higher commitment to the organization, higher employee satisfaction and better employment relations. Again this reinforces the benefits of pursuing a set of progressive HRM practices.’ They also emphasize the importance of a high-involvement climate and suggest in particular that HRM practices such as the provision of opportunities for learning, training and development, focus on job security, promotion and careers, minimizing status differentials, fair reward systems and comprehensive communication and involvement processes will all contribute to a positive psychological contract (Guest et al, 1996).

Steps taken to manage the employment relationship, helps to form a positive psychological contract. These include:
• defining expectations during recruitment and induction programmes;
• communicating and agreeing expectations as part of the continuing dialogue implicit in good performance management practices;
• adopting a policy of transparency on company policies and procedures and on management’s proposals and decisions as they affect people;
• generally treating people as stakeholders, relying on consensus and cooperation rather than control and coercion.

It is more common today in the agreement of a psychological contract for organisations to take steps in increasing mutuality and to provide scope for lateral career development and improvement in knowledge and skills through opportunities for learning. Organisations recognise that because they can no longer guarantee long-term employment they have the responsibility to help people to continue to develop their careers if they have to move on (Spindler, 1994). In other words they take steps to improve employability. Even those that have fully embraced the ‘core– periphery’ concept may recognise that they still need to obtain the commitment of their core employees and pay attention to their continuous development, although in most organisations the emphasis is likely to be on self development (Spindler, 1994).

Traditionally, the psychological contract was viewed as committing both sides to a relationship in which employees gave organisations their loyalty, and organisations gave employees steady employment. However, increasingly, management practices are significantly affecting the psychological commitment of employees. Downsizing and restructuring, for example, are making it more difficult to identify what both the employee and the organisation are owed in the exchange relationship. The development is therefore highly crucial to the success and relationship of the employer-employee psychological contract.

Reference List

Armstrong, Michael. 2006, Handbook of Human Resource Management Practice, 10th Edition, GBR: Kogan Page, London

Guest, D.E. and Conway, N. 2005, Well-being and the Psychological Contract, CIPD,

Guest, D.E. Conway, N. Briner, R. and Dickman, M. 1996, The State of the Psychological Contract in Employment: Issues in people management, Institute of Personnel and Development, London

Guzzo, R.A. and Noonan, K.A. 1994, Human resource practices as communication and
the psychological contract, Human Resource Management, Fall

Maunder, R. 1998, Management in practice, Human Resource Management in practice, New York

Rousseau, D.M. and Wade-Benzoni, K.A. 1994, Linking strategy and human resource
practices: how employee and customer contracts are created, Human Resource
Management, USA

Schein, E.H. 1965, Organisational Psychology, Prentice-Hall, Englewood cliff, NJ

Spindler, G S. 1994, Psychological contracts in the workplace: a lawyer’s view, Human
Resource Management, New York

Stroh, Linda K. 2002, Organizational Behaviour: A Management Challenge.
Mahwah, USA, Lawrence Erlbaum Associates Incorporated

Sims, R.R. 1994, Human resource management’s role in clarifying the new psychological contract, Human Resource Management, Fall
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